China tells banks to set aside reserves for forex forwards

China wants foreign lenders that conduct foreign exchange forward trading for their clients to set aside reserves, making it costlier to bet against a weakening yuan.

The Wall Street Journal is reporting that the China Foreign Exchange Trade System, which is run by the central bank, is requiring these banks to have reserves equal to 20 percent of their forward trade position.

The interest rate for the reserve deposits, to be held at the China Foreign Exchange Trade System, will be zero.

The new measure, which will take effect on Aug. 15, expands to foreign banks a similar requirement imposed on China’s domestic banks last year.

At the time, Beijing moved to curb a selloff in the yuan after the central bank’s surprise devaluation of the Chinese currency in August.

The new reserve requirement ratio slapped on foreign banks also comes after China opened its domestic foreign exchange market to foreign financial institutions earlier this year as part of efforts to liberalize the country’s capital account.

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